Chapter 3 - The Accounting Cycle kakakakakakkaka.pptx

THE ACCOUNTING CYCLE
CHAPTER 3

At the end of this chapter, you should be able to:
 Describe basic steps in the accounting cycle.
 Show how business transactions are recorded in
the journal.
 Show how journal entries are posted to the ledger
accounts.
 How the ledger accounts are balanced.
 Explain a trial balance and show how it is
prepared.
 Discuss the limitations of trial balance.
 Prepare Statement of Profit or Loss and
Statement of Financial Position.
Learning Outcomes

Accounting Cycle
The accounting cycle is the step by
step procedures necessary to come
out with the end results of
accounting and which serves as a
communication tool of cooperative
to various interested parties, the
Financial Statements.

Stated Otherwise
Accounting cycle is a process of a
complete sequence of accounting
procedures in appropriate order
during each accounting period.
Accounting process is a combination of
a series of activities that begin when a
transaction takes place and ends with
its inclusion in the financial statements
at the end of the accounting period.
Accounting Cycle vs
Accounting
Process

 The sequence of accounting
procedures used to record, classify
and summarize accounting
information is called the
Accounting Cycle.
 The term indicates that these
procedures must be repeated
continuously to enable the
business to prepare new up-to-
date financial statements at
reasonable intervals.
Accounting Cycle

 The primary objective of the accounting cycle in an
organization is to process financial information and to
prepare financial statements at the end of the accounting
period.
 An accounting cycle is a continuous
and fixed process that needs to be
followed accordingly.
 Maintenance of the continuity
accounting cycle is important.
Objective of the Accounting
Cycle

Analysing and Classify Data about
an Economic Event
 Identifying the transactions from the events is the first step
in the accounting process.
 Events are analysed to find the impact on the financial
position or to be more specific the impacts on the
accounting equation.
 Documents such as; a receipt, an
invoice, a depreciation schedule,
and a bank statement, etc. provide
evidence that an economic event
has actually occurred.

10
SOURCE DOCUMENTS
Source Documents Uses
Invoice Inform buyer the amount to pay for goods and
services supplied by supplier
Credit Note Correct overcharge invoice
Debit Note Correct undercharge invoice
Payment Voucher Evidence of payment to a named party
Cheque Counterfoil Record amount paid on a numbered cheque
Receipt Acknowledge money received
Bank Statement Summary of monthly transactions of account
holders with the bank
Source Documents

The Flow of Accounting
Data
Business
Transaction
s Occurs
Source
Documents
Prepared
Transactio
n Analysis
Takes Place
Transaction
Entered in
The Journal
Amounts
Posted to
the Ledger

Journalizing the Transaction
 Under the double-entry system,
there are mainly 7 different types
of journal in accounting.
 Transactions are primarily
recorded
in the journal and thereafter posted to
the ledger.
 It is difficult to find out effects and information
relating to the transaction if all the transactions are
recorded in a single journal.

 Journals are the books in
which transactions
being first recorded,
before the entries are
made in the double
entry accounts.
 The journal is also
known as the book of
prime/original entry.

 In the journal, all transactions
are recorded systematically
and chronologically in
accordance with the double
entry system.
 Process of recording business
transactions in the journal is
known journalizing.

 Recording of all transactions in one general journal is a time
consuming, laborious and troublesome task.
 That is why in modern times the use of
many journals instead of one journal has
been introduced in almost all business
concerns, especially the medium and
large size business concerns.
 For convenient keeping of accounts, maintaining more than
one special journal according to the nature of transactions
instead of one journal is called classification of the journal.

 The transactions of the same
nature are recorded in a special
journal.
 These are termed as a daily
journal, subsidiary journal or
special journal.
 Most large size business
concerns record particular
transactions in special journal,
side by side general journal.

Types of Journal in Accounting
Journal Purpose
General Journal To record all transactions which do not fall
under any of other specific journals.
Sales Journal To record all credit sales.
Purchases Journal To record all credit purchases.
Returns Inwards Journal To record all returns inwards.
Returns Outward Journal To record all returns outwards.
Cash Book To record all receipts and payments of cash
and cheques.
Petty Cash Book To record all petty cash transactions.

Source Documents
Journal Purpose
General Journal Invoice, memo etc.
Sales Journal Sales invoice and debit note issued to
customers.
Purchases Journal Purchases invoice and debit note received
from suppliers.
Returns Inwards Journal Credit note issued to customers.
Returns Outward Journal Credit note received from suppliers.
Cash Book Receipt, cheque butt, bank slip and
payment vouchers.
Petty Cash Book Petty cash vouchers.

Advantages of Journal
 To aid analysis by keeping similar
items together (shows in one
place the complete effect for
every transaction).
 As a control feature to decrease
the possibility of doing
mistakes
and fraud (easy for checking/tracking
mistakes).
 The use of journals can support
audit
trail which facilitates in detection of
errors.

Posting from the Journals to the
Ledger
 Transactions recorded in the general journal are then posted
to the general ledger accounts.
 Posting refers to the procedure of
transferring information from the
journal to the ledger account.
 The accounts classify accounting
data
into certain categories and they are recorded in general
journal entries according to that classification.
 Depending on the frequency of the transactions posting to
ledger accounts may be less frequent.

Types of Ledgers in Accounting
 General ledger
 Sales ledger
 Purchases ledger
 Return inwards
ledger
 Return outwards
ledger
 Cash Book

Preparing the Unadjusted Trial Balance
 To determine the equality of debits and credits as recorded
in the general ledger, an unadjusted trial balance is prepared.
 Trial balance is a list of account titles and their balances in
the books, on a specific date, shown in debit
and credit columns.
 Based on the double entry concept, the
total of debit entry for all transactions
must equal to the total of credit entry.
 To check if the two totals are equal, the
trial balance will be prepared at the
end of a period.

Preparing the Unadjusted Trial Balance
 It is a way to investigate and find the fault or prove the
correctness of the previous steps before proceeding to the
next step.
 Unadjusted trial balance makes the next steps of the
accounting process easy and provides the balances of all the
accounts that may require an
adjustment in the next step.
 The unadjusted trial balance is
for internal use only.

Purposes of Trial Balance
 It acts as a test of the equality
of the debit and credit balances
in the ledger.
 It helps to localize errors within
a given time period.
 It helps to facilitate the
preparation of the financial
statements.

Format of Trial Balance
CleanShine
Trial Balance as at 30 April 20x6
Details Debit (RM) Credit (RM)
Cash 9 650
Cleaning equipment 26 000
Motor vehicles 30 000
Bank loans 30 000
Creditor - Teguh Enterprise 2 000
Capital 35 000
Drawings 2 400
Cleaning supplies 2 200
Salaries 3 200
Cleaning service revenue 6 450
73 450 73 450

Recording Adjusting Entries
 Adjusting entries ensure that the
revenue recognition and matching
principles are followed.
 To find the revenues and expenses
of an accounting period adjustments
are required.
 Adjusting entries are required to
be is because a transaction may have influence revenues or
expenses beyond the current accounting period and to
journalize to the events that not yet recorded.

Preparing the Adjusted Trial
Balance
 An adjusted trial balance is prepared after all adjusting
entries have been journalized and posted.
 It shows the balances of all accounts at the end of
accounting period and the effects of all financial events that
have occurred during the period.
 It is an internal document and
is not a financial statement.

Preparing the Adjusted Trial
Balance
 It proves the equality of the total debit and credit balances
in the ledger after all adjustments have been made.
 Financial statements can be prepared directly from the
adjusted trial balance.

Preparing Financial
Statements
 Financial statements are prepared
by transferring the account balances
from the adjusted trial balance.
 The financial statements are made
at the very last of the accounting
period.
 This is the output of the accounting process, which is used
by the interested parties both within and out of the
organization.

Preparing the Statement of Income from
Trial Balance (Service Business)
CleanShine
Accounts Debit (RM) Credit (RM)
Cash 9 650
Cleaning equipment 26 000
Motor vehicles 30 000
Bank loans 30 000
Jonny Enterprise 2 000
Capital 35 000
Drawings 2 400
Salaries 3 200
Cle. Serv. revenue 6 450
73 450 73 450
CleanShine
Statement of Comprehensive Income
for the month ended 30 Apr 20x6
(RM) (RM)
Revenue:
Cle. Serv. Revenue 6 450
Expenses:
Salaries 3 200 (5 400)
Net profit 1 050
Will be added to the owner’s
equity in the Statement of Financial
Position to increase the owner’s
equity.
Transfer all revenues and expenses accounts to
Income Statement to determine net profit.
The amount of net profit will be then
transferred to Statement of Financial Position.

Transfer Assets, Liabilities and Owner’s equity
accounts to Statement of Financial Position.
CleanShine
Accounts Debit (RM)
Credit (RM)
Cash
Cleaning equipment
Motor vehicles
Bank loans
Jonny Enterprise
Capital
Drawings
Cleaning supplies
Salaries
Cle. Serv.
revenue
9 650
26 000
30 000
2 400
2 200
3 200
73 450
30 000
2 000
35 000
6 450
73 450
CleanShine
Statement of Financial Position as at 30 Apr 20x6
(RM)
(RM)
Assets:
Motor vehicles
Cleaning equipment
Cash
Liabilities:
Bank
loan
Creditors
Owner’s equity:
Capital
(+) Net profit
(-) Drawings
35 000
1 050
(2 400)
30 000
26 000
9 650
65 650
30 000
2 000
33 650
65 650
Amount from Income
Statement
Preparing the Statement of Financial
Position from Trial Balance (Service
Business)

Recording Closing Entries
 At the end of an accounting period,
closing entries are made to transfer
data in the temporary accounts
to the financial statements.
 Transferring the balances of the
temporary accounts or nominal
accounts (e.g. revenue and expense
accounts) is used because these
types of accounts only affect one
accounting period.

Preparing a Closing Trial Balance
 To make sure that debits
equal credits, the final trial
balance is prepared.
 As the temporary ones have
been closed only the
permanent accounts appear
on the closing trial balance to
make sure that debits equal
credits.

Recording Reversing
Entries
 A reversing entry is made at the beginning of the next
accounting period.
 The purpose of reversing entries is to simplify the recording
of a subsequent transaction related to an adjusting entry.
 Reversing entries are most often used
to reverse two types of adjusting
entries: accrued revenues and
accrued expenses.

Chapter 3 - The Accounting Cycle kakakakakakkaka.pptx

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